Spain's banking system will have to be bailed out in the coming months, with lenders jettisoning overseas assets to survive, according to one of Europe's leading fund managers.
Dominic Rossi, chief investment officer for equities at Fidelity Worldwide Investment, likened the ensuing collapse, which will include the exit of Greece from the euro, to the 1990s Latin American meltdown.
"I don't think it will be long before Spain will need to seek official assistance in the recapitalisation of its banks from both the European Central Bank and the International Monetary Fund." he said.
"Spain has a lot of assets outside of the country which can be sold and certainly I suspect some of those assets will come on to the market in order to recapitalise the banks before this is all over."
Mr Rossi, who oversees £155bn of assets at Fidelity, believes that the Greek exit could provide the impetus for greater debt reduction in other struggling eurozone nations.
"The key for me, in the event that Greece does come out, is what is the popular reaction in both Spain and Italy towards austerity?" he said. "We have seen support for austerity shrink over the course of the last few months. What I would hope and expect to see is once Greece leaves the euro that the impact it has is visible to all, and that will engender far more support in Spain and Italy for the current programme."
It will also point to a further period of turmoil for Europe's banks which are sat on billions of pounds of exposure to sovereign debt.
"I think the first issue with the banks is how sound are their book values? We are now in a second downturn and that will have implications for non-performing loans and provisioning.
"Everything is pointing to the banks continuing to shrink and continuing to have to provide more regulatory capital, which means that the overall return profile of the banking sector in Europe is going to be very low. The returns now resemble rather poorly run utilities."
However, Mr Rossi believes that British banks are in better shape because they have already taken steps to boost their capital positions and have a smaller exposure to sovereign debt.
He criticised politicians for failing to take control of the situation months ago. "I still don't understand why there was from the very start this perception that it's impossible for a nation state within the eurozone to go bust. But once you get on to the slippery slope of support then it's very difficult to get off that."
Andrew Wells, chief investment officer for fixed income at Fidelity, said that markets have suddenly realised that you cannot negotiate long-term refinancing with a government that changes on a constant basis.
"What is driving Greece away from Europe is a lack of political long-term stability, which means that it is impossible to deliver a long-term financial solution. This means there has to be a resolution around Greece before any sort of confidence comes back to the markets."
Mr Wells said that high-quality companies or high-quality bonds are the place to be until the political roadmap is more certain. "This is not the time to be jumping into high-risk assets because the political uncertainty remains," the fixed-income specialist said.
The Independent
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